Many property investors – whether landlords or developers – have heard of ‘Entrepreneurs Relief’ (ER), but aren’t clear about what it is and whether they could benefit from this tax relief. This article explains what ER is, when it can be claimed, and when it may not be beneficial to claim ER.
What is Entrepreneurs Relief exactly, and can I claim it?
ER is a tax relief available to property development and trading companies, enabling the company to be closed and a reduced rate of CGT (10%) paid on the total value of the company. This can be valuable compared with the alternative of paying 32.5% dividend tax to take out funds from the company for higher rate company owners, or the 20% CGT rate payable on the disposal of other capital assets (28% for residential property). There is a lifetime limit on ER claims of £10m/person (which of course is plenty for most smaller property developers).
ER is specifically not available to owners of property investment companies – therefore it is crucial to understand the difference between a property investment company and a trading company.
A property investment company generally holds property for long-term investment, and generates a return via rental income. Property may be sold occasionally, but the intention at the outset for each purchase would be to rent, rather than flip, the property.
A property development/trading company generally buys land and property to develop/renovate and sell for a short term profit. Property would normally be financed using non-permanent finance (cash/bridge etc.) and sold when developed, realising a trading profit.